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IMF warns of world recession

THE INTERNATIONAL Monetary Fund (IMF) yesterday sharply cut its projections for world economic growth and warned there was a risk of a global recession.

It said the US and the euro area both needed to consider "a moderate easing of monetary policies" to help to mitigate the global crisis.

According to the IMF, the global economy will grow by just 2 per cent this year and 2.5 per cent in 1999. In May, the IMF forecast that world economic growth would be 3.1 per cent in 1998 and 3.7 per cent in 1999.

World economic growth will be more balanced next year, the IMF says, with some modest recovery in Asia but a downturn in the hitherto buoyant economies of the US and western Europe.

The IMF warned that there were "predominantly downside risks" to its new growth projections, which are still significantly more optimistic than many City forecasts.

The risks of worse-than-expected economic growth would be particularly great if "the acute pressures on financial flows to emerging economies persist", according to Michael Mussa, IMF economic counsellor and director of research.

The global crisis has so far cost $600bn to $800bn in terms of income forgone, according to the IMF. This is approximately equal to an economy the size of Canada "taking the year off", Mr Mussa said.

Although the IMF is not predicting a global recession - which it defines as world annual economic growth of 1 per cent or less - this nevertheless remains a risk.

Mr Mussa said global recession was an unlikely outcome but it was not impossible.

The IMF predicted most Asian economies would start to recover next year. The Japanese economy, for example, is forecast to grow by 0.5 per cent in 1999, after contracting by 2.5 per cent in 1998.

However, the economies of US and western Europe, which have to date been relatively unaffected by the market turmoil, will start to turn down.

The UK economy is forecast by the IMF to grow by 1.2 per cent in 1999, considerably less than forecast by the Treasury, and the second lowest growth forecast in the G7.

The IMF - which is not forecasting an outright recession in the UK - said the slowdown reflected "a tightening of monetary and fiscal policy".

The IMF urged the 11 European countries participating in the first wave of Economic and Monetary Union to tighten fiscal policy, but said there was room for manoeuvre on short-term interest rates.

Mr Mussa attacked the suggestion that the IMF only ever advocated a tightening of monetary and fiscal policy as "nonsense". He said the fund was advocating tighter policy for only 10 per cent of the world's economy.